Building BC for the 21 st Century Presented to: Construction - PowerPoint PPT Presentation

Building BC for the 21 st Century Presented to: Construction Council Vancouver Island: Capital Project Forum 2015 May 13, 2015 Ken Peacock Chief Economist and Vice President

Business Council 260 large and medium-sized companies and institutions from every sector of BC’s Economy Represents over 25 % of BC’s Employment Thoughtful public policy and economic leader Non Partisan Collaborator » First Nations » Educational institutions » Governments » Industry » NGOs

BCBC’s Work Areas of policy focus » Competitive economic climate • infrastructure • regulatory • trade • environmental sustainability • certainty and access to the land base » Energy » Innovation and Productivity » Human Capital » First Nations

4 Importance of Infrastructure Strong positive returns on infrastructure investment » 1980s David Aschauer estimated rate of return of 50%+ » subsequent work shows lower but still positive returns » shown to lift GDP per capita Boosts economic output » directly through planning and construction phase » infrastructure services are inputs into production process of other sectors » lifts productivity Improves quality of life

Larry Summers, former Chair of the 5 US Council of Economic Advisors… “The US needs long -term budgeting for infrastructure that recognizes benefits as well as costs.” “Projects should be approved with reasonable speed.” “The budgetary arithmetic associated with infrastructure investment is attractive at a time of record low real interest rates and when there are enough unused economic resources that greater infrastructure investment need not come at the expense of other spending.” Larry Summers “Why Public Investment Really is a Free Lunch,” Financial Times, October 6, 2014

Governments Are Generally Not Well-placed to Meet 6 Growing Infrastructure Needs Constrained public budgets Aging population and growing demand for healthcare funding Slower economic growth Environmental concerns Projects increasingly complex

7 Health Care Takes More Resources Spending as a Share of Nominal GDP, % 9 8 7 2002/03 2013/14 6 5 4 3 2 1 0 Health Education Social Protection Trans- Natural other General Interest Services portation resources government Source: BC Financial and Economic Review

8 Total Provincial Gov’t Capital Spending Stable Provincial Capital Spending, millions $ 8,200 7,200 6,200 5,200 4,200 3,200 2,200 Total 1,200 Tax-payer supported 200 03/04 02/03 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18 Source: BC Economic and Financial Review and 2015 BC Provincial Budget

9 But on a Per Capital Basis Edging Lower Real per Capita Provincial Capital Spending, $ 1,600 1,400 1,200 1,000 800 600 Total 400 Tax-payer supported 200 03/04 02/03 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18 Source: BC Economic and Financial Review and 2015 BC Provincial Budget

10 Sub Par Economic Growth BC Real* GDP Growth, % 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 Total avg. 1995 to 2014 -2.0 -3.0 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: Statistics Canada, Provincial Economic Accounts * chained 2007$ average excludes 2009 recession

11 BC Middling Performer on GDP per Capita Avg Annual Growth in Real GDP per Capita, 2008-2013, % 1.0 0.8 0.5 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.5 -0.6 N&L NB Ont Que PEI BC Alta NS Man Sask Source: Statistics Canada, Provincial Economic Accounts.

12 Factors Shaping Infrastructure Needs Trade and greater integration with Asia – Gateway role Population growth Demographics – aging Urbanization Globalization and competitiveness Communications and information revolution Environmental considerations Aging of existing infrastructure assets

Diversified Trade: A Long-Term BC Advantage 13 (average annual share of international goods exports by province, 2014, per cent) BC Alberta Ontario Other Asia, Other, Asia, Other, 4.7% 5.1% 9.5% Other, Asia, China, 16.0% 4.7% 11.9% 17.7% Japan, 10.3% US, 50.6% US, US, 90.2% 79.3% Source: BC Stats.

14 Rise of Asia Continues – Top 10 Economies Projected Projected GDP 2014 GDP 2050 Country Country GDP 2030 Country (US$ bn PPP) (US $ bn PPP) (US $ bn PPP) China 17,632 China 36,112 China 61,079 US 17,416 US 25,451 India 42,205 India 7,277 India 17,138 US 41,384 Japan 4,788 Japan 6,006 Indonesia 12,210 Germany 3,621 Indonesia 5,486 Brazil 9,164 Russia 3,559 Brazil 4,996 Mexico 8,014 Brazil 3,073 Russia 4,854 Japan 7,914 France 2,587 Germany 4,590 Russia 7,575 Indonesia 2,554 Mexico 3,985 Nigeria 7,345 UK 2,435 UK 3,586 Germany 6,338 Source: PWC, The World in 2050

15 Population Growth Slows BC Population Growth, % 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 Source: BC Stats.

16 But Actual Increase in Coming Years Higher than Recent Past Increase in BC Population, persons 120,000 100,000 Past 10 years Coming 10 years population increased population projected to 80,000 by 475,000 increase by 600,000 60,000 40,000 20,000 0 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 Source: BC Stats.

17 Stronger Population Growth Expected on Southern Island Average Population Growth, % 1.4 2010-14 2015-19 2020-24 1.2 1.0 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 Source: BC Stats.

18 Ratio of 65+ to Working Age Population Climbs BC Number of Persons 65+ for every 100 Working Age (25-64) 45 40.3 40 35 25.7 30 25 18.8 20 15 10 5 0 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 Source: BC Stats.

19 Island Expected to Age More Rapidly than BC Average Number of Persons 65+ for every 100 Working Age (25-64) 70 1995 2015 2035 60 50 40 30 20 10 0 Source: BC Stats.

20 Record Low Borrowing Costs Gov’t of Canada Bonds (over 10 years) Average Yield, quarterly, % 18 16 14 12 10 8 6 4 2 0 36 42 48 54 60 66 72 78 84 90 96 02 08 14 Source: Statistics Canada. Latest : Q3 2014

21 Remarkably Low Interest Rates Ten Year Government Bond Yields, April 14, 2015, % 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Source: Bloomberg.

22 Infrastructure Deficit Historic shortfall has left an infrastructure deficit » Canada used to invest equivalent 5% of GDP » fell to 2% and has climbed back to 4% Aging infrastructure also a concern Municipalities are now responsible for the largest share of the nation’s stock of infrastructure Given the age of infrastructure assets, financing will have to flow into maintenance

23 Financing Infrastructure Government financing rests mostly on tax revenues and funds garnered from borrowing » federal government routinely supports infrastructure investment Private resources » growing role for private sector including user fees » banks important financiers » bond market also has a long history of providing debt financing • P3s, IPPs, YVR, BC Ferries, Port Authority

24 Broadening Finance Options Pension funds » predictable and stable cash flows » higher returns than other fixed income investments » offers the opportunity to deploy large amounts of capital » better marching of assets and liabilities Barriers » shortfall of a pipeline of projects » governments like to retain control of natural monopolies » costly to build up in-house expertise » infrastructure may not be a good hedge against inflation

25 Recommendations from BCBC Paper Develop a long-term strategic infrastructure plan » help coordinate regional development strategies » prioritize projects » create pipeline of projects Leverage financing opportunities » take advantage of historic low borrowing costs » tap private sector capital and expertise » a mend province’s accounting policy – current treatment of self- supported debt at BC universities » consider a provincial infrastructure fund administered by a stand alone agency » review capital requirement & taxation capacity of municipalities » green bonds

26 Recommendations from BCBC Paper Seek support from federal government » make infrastructure a top priority in all discussion with the federal government » continue to advocate for the importance of the Asia Pacific Gateway Make greater use of demand management tools Improve the regulatory environment

27 Recap BC has done well in making strategic infrastructure investments But we need to invest more in infrastructure in BC, especially economic infrastructure Need to build new and upgrade existing assets Implement a long-term infrastructure strategy / plan Focus on developing new and innovative ways to finance infrastructure

28 From the October 2014 IMF World Economic Outlook Advocates a stepped-up pace of infrastructure investment across the OECD, led by the public sector Notes that public sector capital spending has trended lower as a share of output across the advanced industrial economies in recent decades Argues that record low borrowing costs for high quality credits, coupled with continued economic slack, make today an unusually opportune time to expand public sector infrastructure outlays